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`Page 1 of 5
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`TRADING TECH EXHIBIT 2206
`IBG ET AL. v. TRADING TECH
`CBM2016-00009
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`2
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`3
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`2.8
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`2
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`Q
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`ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2007
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`Cautionarv Note Regarding Forward Looking Statements
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`Table of Contents
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`1 I
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`TEM 1.
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`Business
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`Legal..B:9ceedi11gsmd..Regulat9ry...Matte:s
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`Submission of Matters to a Vote of Secuiitv Holders
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`Market for Registranfs Common Equitv Related Stockholder Matters and Issuer Purchases of Equitv
`Securities
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`ITEM 4.
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`PART 11
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`ITEVI 5.
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`ITEVI 8.
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`ITEVI 9.
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`Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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`ITEVI 9A.
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`Controls and Procedures
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`ITEVI 9B.
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`ITEM 12,
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`Secuiitv Ownership of Certain Beneficial Owners a11d Management and Related Stockholder Matters
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`ITEM 13.
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`Principal Accountant Fees and Services
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`PART IV
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`and...l.5a(.a).(2)
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`decisions and trade efficiently. Our system is configured to remember the user’s preferences and is specifically designed for
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`multi-screen systems. When away from their main workstations, customers are able to access their accounts through our IB
`WebTraderSM or MobileTrader interfaces.
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`Interactive AnalyticSSM and [B Options Analyticsw - We offer our customers state-of-the-art tools, which include a
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`customizable trading platform, advanced analytic tools and sophisticated order types such as guaranteed combination trades.
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`IB also provides real-time option analytics, an arbitrage meter (a tool that illustrates the extent of the premium (or discount)
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`of the lead month futures price above (or below) its fair future value with respect to the index price) and various
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`combinations of charts and other analytical tools.
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`[B Risk NavigatorSM - We offer free to all customers, our real-time market risk management platform that unifies exposure
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`across multiple asset classes around the globe. The system is capable of identifying overexposure to risk by starting at the
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`portfolio level and drilling down into successively greater detail within multiple report views. Report data is updated every
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`ten seconds or upon changes to portfolio composition. Predefined reports allow the summarization of a portfolio from
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`different risk perspectives, and allow views of Exposure, Value at Risk (“VaR”), Delta, Gamma, Vega and Theta and profit
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`and loss and position quantity measures for the different portfolio views. The system also offers the customer the ability to
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`modify positions through “what-if’ scenarios that show hypothetical changes to the risk summary.
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`0 White Labeling - Our large bank and broker-dealer customers may “white label” our trading interface or can select from
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`among our modular functionalities, such as order routing, trade reporting or clearing, on specific products or exchanges
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`where they may not have up-to-date technology, in order to offer to their customers a complete global range of services and
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`IB provides its customers with high-speed trade execution at low commission rates, in large part because it utilizes the
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`backbone technology developed for Timber Hill’s market making operations. As a result of our advanced electromc brokerage
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`platform, IB attracts sophisticated and active investors. No single customer represents more than 1.1% of our commissions and
`execution fees.
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`Technology
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`Our proprietary technology is the key to our success. We built our business on the belief that a fully computerized market
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`making system that could integrate pricing and risk exposure information quickly and continuously would enable us to make markets
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`profitably in many different financial instruments simultaneously. We believe that integrating our system with electromc exchanges
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`and market centers results in transparency, liquidity and efficiencies of scale. Together with the IB SmartRoutingSM system and our
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`low commissions, this reduces overall transaction costs to our customers and, in turn, increases our transaction volume and profits.
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`Over the past 30 years, we have developed an integrated trading system and commumcations network and have positioned our
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`company as an efficient conduit for the global flow of risk capital across asset and product classes on electromc exchanges around the
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`world, permitting us to have one of the lowest cost structures in the industry. We believe that developing, maintaimng and continuing
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`to enhance our proprietary technology provides us and our customers with the competitive advantage of being able to adapt quickly to
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`the changing enviromnent of our industry and to take advantage of opportumties presented by new exchanges, products or regulatory
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`changes before our competitors.
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`The quotes that we provide as market makers are driven by proprietary mathematical models that assimilate market data and
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`reevaluate our outstanding quotes each second. Because our technology infrastructure enables us to process large volumes of pricing
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`and risk exposure information rapidly, we are able to make markets profitably in securities with relatively low spreads between bid
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`and offer prices. As market makers, we must ensure that our interfaces connect effectively and efficiently with each exchange and
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`market center where we make markets and that they are in complete conformity with all the applicable mles of each local venue.
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`Utilizing up-to-date computer and telecommumcations systems, we transmit continually updated pricing information directly to
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`exchange computer devices and receive trade and quote information for immediate processing by our systems. As a result, we are
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`able to maintain more effective control over our exposure to price and volatility movements on a real-time basis than many of our
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`competitors. This is important, not only because our system must process, clear and settle several hundred thousand market maker
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`trades per day with a mimmal number of errors, but also because the system momtors and manages the risk on the entire portfolio,
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`which generally consists of several million open contracts distributed among more than 100,000 different products. Using our system,
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`which we believe affords an optimal interplay of decentralized trading activity and centralized risk management, we quote markets in
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`approximately 420,000 securities and futures products traded around the world.
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`Page 3 of 5
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`In our electronic brokerage business, our proprietary technology infrastructure enables us to provide our customers with the
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`ability to effect trades at among the lowest execution and commission costs in the industry. Additionally, our customers benefit from
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`real-time systems optimization for our market making business. Customer trades are both automatically captured and reported in real
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`time in our system. Our customers trade on more than 60 exchanges and market centers in 16 countries around the world. All of these
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`exchanges are partially or fully electromc, meaning that a customer can buy or sell a product traded on that exchange via an electromc
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`link from his or her computer terminal through our system to the exchange. We offer our products and services through a global
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`commumcations network that is designed to provide secure, reliable and timely access to the most current market information. We
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`provide our customers with a variety of means to connect to our brokerage systems, including dedicated point-to-point data lines,
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`virtual private networks and the Internet.
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`Specifically, our customers receive worldwide direct-access connectivity through our Trader Workstation (our real-time Java-
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`based trading platform), our proprietary Application Program Interface (“API”), and/or industry standard Financial Information
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`Exchange (“FIX”) connectivity. Customers who want a professional quality trading application with a sophisticated user interface
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`utilize our Trader Workstation. Customers interested in developing program trading applications in MS-Excel, Java, Visual Basic or
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`C++ utilize our API. Large institutions with FIX infrastructure prefer to use our FIX solution for seamless integration of their existing
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`order gathering and reporting applications.
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`While many brokerages, including online brokerages, rely on manual procedures to execute many day-to-day functions, IB
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`employs proprietary technology to automate, or otherwise facilitate, many of the following functions:
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`account opemng process;
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`order routing and best execution;
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`seamless trading across all types of securities and currencies around the world from one account;
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`order types and analytical tools offered to customers;
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`delivery of customer information, such as confirmations, customizable real-time account statements and audit trails;
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`customer service; and
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`risk management through automated real-time credit management of all new orders and margin momtoring.
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`Research and Development
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`One of our core strengths is our expertise in the rapid development and deployment of automated technology for the financial
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`markets. Our core software technology is developed internally, and we do not generally rely on outside vendors for software
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`development or maintenance. To achieve optimal performance from our systems, we are continuously rewriting and upgrading our
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`software. Use of the best available technology not only improves our performance but also helps us attract and retain talented
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`developers. Our software development costs are low because the employees who oversee the development of the software are the
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`same employees who design the application and evaluate its performance. This also enables us to add features and further refine our
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`software rapidly.
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`Our intemally-developed, fully integrated trading and risk management systems are unique and transact across all product
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`classes on more than 70 markets and 14 currencies around the world. These systems have the flexibility to assimilate new exchanges
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`and new product classes without compromising transaction speed or fault tolerance. Fault tolerance, or the ability to maintain system
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`performance despite exchange malfunctions or hardware failures, is crucial to successful market making and ensuring best executions
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`for brokerage customers. Our systems are designed to detect exchange malfunctions and quickly take corrective actions by re-routing
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`pending orders.
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`Our company is technology-focused, and our management team is hands-on and technology-savvy. Most members of the
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`management team write detailed program specifications for new applications. The development queue is prioritized and highly
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`disciplined. Progress on programming imtiatives is generally tracked on a weekly basis by a steering committee consisting of semor
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`executives. This enables us to prioritize key imtiatives and achieve rapid results. All new business starts as a software development
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`project. We generally do not engage in any business that we cannot automate and incorporate into our platform prior to entering into
`the business.
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`The rapid software development and deployment cycle is achieved by our ability to leverage a highly integrated, object
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`oriented development enviromnent. The software code is modular, with each object providing a specific function and being reusable
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`in multiple applications. New software releases are tracked and tested with proprietary automated testing tools. We are not hindered
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`by disparate and often limiting legacy systems assembled through acquisitions. Virtually all of our software has been developed and
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`maintained with a unified purpose.
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`For 30 years, we have built and continuously refined our automated and integrated, real-time systems for world-wide trading,
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`risk management, clearing and cash management, among others. We have also assembled a proprietary connectivity network between
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`us and exchanges around the world. Efficiency and speed in performing prescribed functions are always crucial requirements for our
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`systems. As a result, our trading systems are able to assimilate market data, recalculate and distribute streaming quotes for tradable
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`products in all product classes each second.
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`Risk Management Activities
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`The core of our risk management philosophy is the utilization of our fully integrated computer systems to perform critical,
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`risk-management activities on a real-time basis. In our market making business, our real-time integrated risk management system
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`seeks to ensure that overall IBG positions are continuously hedged at all times, curtailing risk. In our electromc brokerage business,
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`integrated risk management seeks to ensure that each customer’s positions are continuously credit checked and brought into
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`compliance if equity falls short of margin requirements, curtailing bad debt losses.
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`Market Making
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`We employ certain hedging and risk management techmques to protect us from a severe market dislocation. Our risk
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`management policies are developed and implemented by our Chairman and our steering committee, which is comprised of semor
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`executives of our various compames. Our strategy is to calculate quotes a few seconds ahead of the market and execute small trades at
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`a tiny but favorable differential as a result. This is made possible by our proprietary pricing model, which evaluates and momtors the
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`risks inherent in our portfolio, assimilates market data and reevaluates the outstanding quotes in our portfolio each second. Our model
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`automatically rebalances our positions throughout each trading day to manage risk exposures both on our options and futures positions
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`and the underlying securities, and will price the increased risk that a position would add to the overall portfolio into the bid and offer
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`prices we post. Under risk management policies implemented and momtored primarily through our computer systems, reports to
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`management, including risk profiles, profit and loss analysis and trading performance, are prepared on a real-time basis as well as
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`daily and periodical bases. Although our market making is completely automated, the trading process and our risk are momtored by a
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`team of individuals who, in real time, observe multiple dimensional representations of various risk parameters of our consolidated
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`positions. Our assets and liabilities are marked-to-market daily for financial reporting purposes and re-valued continuously
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`throughout the trading day for risk management and asset/liability management purposes. No more than 0.5% of firm capital is at risk
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`of loss at any one time.
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`Since 1990 we have rapidly expanded our market presence and the number of financial instruments in which we make
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`markets. This diversification acts as a passive form of portfolio risk management.
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`We trade primarily the options on stocks (and individual stocks) where the underlying equity market capitalization is greater
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`than $1 billion. Throughout the trading day we produce online, real-time profit and loss, risk evaluation, activity and other
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`management reports. Our software assembles from external sources a balance sheet and income statements for our accounting
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`department to reconcile the trading system results.
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`The adaptability of our portfolio risk management system and trading methods have allowed us to expand not only the
`number of financial instruments traded but also across markets.
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`Electronic Brokerage
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`IB calculates margin requirements for each of its customers on a real-time basis across all product classes (stocks, options,
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`futures, bonds and forex) and across all currencies. Recogmzing that IB ’s customers are experienced investors, we expect our
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`customers to manage their positions proactively and we provide tools to facilitate our customers’ position management. However, if a
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`customer’s equity falls below what is required to support that customer’s margin, IB will automatically liquidate positions on a real-
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`time basis to bring the customer’s account into margin compliance. This is done to protect IB, as well as the customer, from excessive
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`losses and further contributes to our low-cost structure. The entire credit management process is completely automated, and IB does
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`not employ a margin department.
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